Interested in Ethical Investment? You Might Want to Read This...

FairPensions has just published a report looking at ethical investment funds. These funds, which are worth £6.5 billion, are usually used by socially and environmentally conscious people who want to save for the future. If you chose the ethical option on your workplace or personal pension it is likely that your money is with one of the providers covered in the research.

Are ethical funds relevant to our concerns?

If you are saving for your retirement in an ethical pension fund you might well expect to have a say in where your money goes. Our research shows that almost two thirds of funds do not actually ask their customers about their ethical preferences. This may go some way towards explaining why traditional 'sin' stocks like porn, gambling and alcohol continue to be regularly screened out of ethical funds while issues like human rights and environmental protection are less likely to be addressed.

What's in your fund?

If you have made the decision to invest in an ethical fund then you're clearly the type of person who cares about what happens with your money. You might be surprised to find out that 45% of funds do not publish a full list of the companies they invest in. If you do manage to find out what is in your fund then you might find that your money is invested in oil, gas or even the production of weapons.

Do ethical funds actually change the world?

For many people the ethical investment of their money allows them to feel good about their savings. If you've found a fund which excludes the worst companies then you might well sleep easily at night, thinking you are doing your best to save without harming people or planet. With businesses whose very existence you disagree with (tobacco is often used as an example), this approach makes sense.

Almost all ethical investment funds exclude certain 'bad' companies from their portfolios - but what about the companies which they do hold shares in? Our survey found that two-thirds of ethical fund providers aren't actively engaging with the companies they own to promote the ethical values of their customers. Most still tend to assume that their job begins and ends with screening out the 'bad guys'. The problem with this approach is that it doesn't tend to actually change the way corporations behave.

Here's an example: Your ethical investment fund has excluded tobacco and alcohol but, to ensure you have some stable stocks, has put lots of money into a big bank. Most people don't disagree with banks per se, but many of us don't like some of the things they do. Let's say that the bank is funding cluster bombs and you persuade your ethical fund that this is an issue that needs to be sorted. Perhaps the best thing would be for your fund to use its clout to affect change within the bank, rather than sell the shares on the stock market to someone who's likely to care a lot less than you do about its ethical stance.

Here at FairPensions we certainly don't rule out disinvesting from companies who behave irresponsibly. But, in a world in which 52 of the largest 100 economies are those of companies (not countries), we think that simply disengaging from every company that misbehaves isn't the best way to affect change. However strict a fund's screens are, it's highly unlikely that ethical issues will never arise at the companies in their portfolio. That's why, in the survey we've just published, one of the ways we rank funds is by their willingness to engage with companies to improve their behaviour.

The best providers we surveyed show what can be done. One helped to persuade advertising company WPP to close its Harare office after it emerged that resources were being diverted to Mugabe's election campaign. Another successfully engaged with an engineering company over the human rights implications of a project in Sudan.

If you have an ethical fund, or you're thinking of starting to invest in one, then you might like to check out our ranking table. We've found an ethical investment world where some providers really try to reflect customers' beliefs and affect change in the companies in which they invest. But we've also found some providers who don't even tell their customers who they invest in or what ethical issues they take into account. Ultimately these funds have the ability to make a real change to corporate behaviour. Our hope is that this report spurs them all on to perform better for the people whose money they manage.